QUESTION ON PAYING RETAIL TAXES

Dear Larry,

I have a one chair salon in my home and I sold $3000.00 in retail last year. Last year I paid the taxes on the retail and backbar when I bought the products. My question is- Should I continue to buy my products this way or should I do the tax defered and pay it at the end of the year? I already have an id # I just haven't known which way I should pay it. I'm new at owning a salon so any advice would be greatly appreciated. Thank you for your time.

Janet

Janet, I received your note regarding retail. Although sales tax laws vary from state to state, and I’m not sure what state you are in, let me give you an overview.

The way I understand it, you are paying your distributor sales tax and then you are turning around and reselling those items. The problem you have is that you are paying sales tax on your costs but not on your sales price.

For example:

If your sales tax rate is 5% and you sold $3,000 worth of items, I would assume the cost of those items was $1,500. If that is the case, then you are probably paying $75 worth of sales tax. When you made the sale of those items for $3,000, you should have received and paid sales tax of $150. In my example, you are beating the state out of $75 of sales tax.

What you need to do is to discontinue paying sales tax on purchase of the retail products, and then charge sales tax on those products when you sell them. Based on the number of sales you have, I would presume that in your state you are not required to file sales tax reports monthly, but rather can file a report at the end of the year. This will save you a lot of paperwork.

The sales tax reports aren’t too difficult. If you need some help with the first sales tax report, you can contact Amanda Hansen from our office at ahansen@kopsaotte.com. She will direct you to the right person who will walk you through the first sales tax report. While I am always upfront about fees, there is a fee for this. The fee for us to do this is $50. Once we get you through the first report, you should be able to do them on your own.

On another item, so I don’t confuse you, you do need to pay sales tax on backbar items you purchase from your distributor. Normally, a distributor will give you two bills, one for backbar items, and one for retail items purchased for resale.

If you have any questions, please let me know.

Larry Kopsa CPA

P&G TO ACQUIRE FEKKAI HAIR CARE

I'm not sure if you knew this, but the Cincinnati-based Procter & Gamble Co. is acquiring the New York-based Frederic Fekkai & Co., which includes high-end hair care products and salons.

According to the Associated Press, the terms of the acquisition from private equity firm Catterton Partners weren't disclosed. The deal is part of P&G's focus on building its high-margin, fast-growing beauty business.

The purchase would add to P&G's line of upscale beauty products that includes SK-II skin care and Hugo Boss fragrances.

HERE IS THE ISSUE THAT I WISH THE PRESIDENTIAL CANIDATES WOULD ADDRESS

(CQ Today) -- The long-term financial outlook for Social Security and Medicare remained grim but essentially unchanged in 2007, trustees for the two huge entitlements said Tuesday. They warned again that Congress should act soon to shore up the programs, advice that lawmakers will probably ignore. The trustees, in their annual report on the two programs, issued a “Medicare funding warning” for the third year in a row, which will require the next president to propose legislation to cut the share of Medicare costs borne by the government. President Bush this year sent Congress the first such proposal, although Democrats who control both chambers are not expected to act on his legislation. The trustees said in their report that Social Security’s trust funds will become insolvent by 2041, while Medicare’s hospital insurance trust fund will hit that point in 2019. Both dates are the same as those predicted last year. When the Social Security trust funds exhaust their reserves, by law benefits would have to be cut to match annual program revenues. There is no such legal requirement for the the Medicare fund, so the government could react to its insolvency simply by borrowing from the treasury to cover shortfalls. Medicare Part A, which is funded by the hospital insurance trust fund, is projected to begin paying more in benefits than it collects from payroll taxes this year.

UNDERSTANDING SMALL BUSINESS TAX DEDUCTIONS

Shortcuts asked that I write the following article for their Evolve Newsletter. If you would like to subscribe to Shortcuts you may visit: www.shortcuts.net.

"Understanding Small Business Tax Deductions" is also accessible on our website at www.kopsaotte.com. Select the salon division and then click forms and publications; or click here for immediate access: Understanding Small Business Tax Deductions

BEWARE - A CLIENT WANTS TO STEAL FROM THE IRS

Lesson... always make your payroll deposits.

I just received a call from a client that told me that she was really short of cash and was not going to make her payroll deposit. I warned the owner that the penalties for not making timely deposits was really harsh. The penalty for even being a few days late is over 25%. On $18,000 not paid in, the penalty can easily be a whooping $4,500 even if it's just a few days late.

She said that this was not fair. I think the comment was, "the Soprano's don't even charge that much." Actually, in the eyes of the IRS, the payroll withholding is not really the owner's money but actually money that you have collected for the IRS; and you are in a "trust" position to give them what is theirs. In other words, it is like you stole their money.

Here is a case that shows what can happen. Click on the name of the case if you are interested in the details.

In other words... always deposit your payroll taxes timely.

Several people can owe a penalty for not depositing payroll taxes with IRS, a court says. A trucking company's CEO was personally liable for the undeposited taxes because he knew that the IRS wasn't being paid and the taxes were being used to pay creditors. The firms' treasurer was also held accountable because he wrote checks to other creditors using the withheld payroll taxes (Horovitz, D.C., Pa.). The IRS can collect the penalty from either person. The penalty is equal to the amount of tax not turned over to the Service. However, if someone who isn't primarily responsible for not depositing the tax pays a disproportionate amount of the penalty, that person can sue in federal court to recover from the other accountable party.

TAKE ADVANTAGE OF THE TAX LAWS

Do Tax Law Changes Drive You Up A Wall?

Are you aware of the latest changes in the constantly shifting tax laws? Do you know how they affect you? As April 15 approaches, do you feel you're paying more than your fair share of income tax? At Kopsa Otte CPA’s, we help clients just like you take advantage of the tax laws to pay the least tax today. And we can give you a plan to pay less tomorrow.

We've been preparing taxes for over 35 years, so we have the experience and knowledge to help you. You may think that taxes are a once-a-year chore. But at Kopsa Otte, we know the "secret" to paying less is a personalized, proactive year-round plan.

Call now to find out how to receive an analysis. We'll do more than just prepare your return. We'll find the mistakes and missed opportunities that may be costing you thousands, then give you a plan for eliminating them forever!

Kopsa Otte

800.975.4829

ahansen@kopsaotte.com

TEN SALON TAX DEDUCTIONS FOR 2008

I thought you might be interested in the following article that I wrote for Behind The Chair.com. Check out their website at http://www.behindthechair.com/, or link directly to the article at Ten Salon Tax Deductions for 2008.

WHERE IS MY STIMULUS CHECK?

More than a quarter of those receiving economic stimulus payments this year should have their money in mid-May, according to information from the IRS. The date stimulus payments will be distributed will be based on the last two digits of the filer's Social Security number. Those who opted to receive their federal income tax refund via direct deposit will receive their stimulus payment sooner than those who will be sent their money by paper check. Direct deposits will be made from May 2 to May 16, while paper-check mailings will run from May 16 to July 11. Individuals who make at least $3,000 in qualifying income can receive a stimulus payment. Here is the schedule for economic stimulus payments:

Direct deposit

Last two digits of SSN Stimulus payment sent by:

· 00-20 ...........................May 2
· 21-75 ...........................May 9
· 76-99 ...........................May 16

Paper checks

Last two digits of SSN Check in the mail by:

· 00-09 ...........................May 16
· 10-18 ...........................May 23
· 19-25 ...........................May 30
· 26-38 ...........................June 6
· 39-51 ...........................June 13
· 52-63 ...........................June 20
· 64-75 ...........................June 27
· 76-87 ...........................July 4
· 88-99 ...........................July 11

MORE ON THE USE OF INDEPENDENT CONTRACTORS

Recently I published information regarding independent contractors. Here is more on that subject from the IRS. Remember this applies to all businesses not just salons and spas, but we may all be in their crosshairs.

If you need any further information let me know and I will send you the releases from the IRS.

This is from Kipplinger...

IRS is on the warpath with new weapons for tracking down companies that violate rules used to determine whether workers are employees or independent contractors for tax purposes. The result: More employment tax audits in a few months after IRS generates more leads.

Take a look at what's in IRS' arsenal:

• More help from the states. The Service so far has signed up 33 states to share data from payroll tax exams, which will likely mean thousands of new audit leads using state records.


• There's another twist: Federal and state agents will train together and even conduct joint exams in some cases. IRS claims it wants classification to be more uniform. However, businesses worry the partnership could ensnare them unfairly because many states have a much broader definition of who is an employee.


• Revved-up matching programs to better pinpoint audit leads and lessen chances for no-change exams. An electronic matching system, for example, lets IRS spot businesses issuing 1099 forms with payments of $25,000 or more to at least five workers with no other income sources.


• Audit leads from workers. IRS will soon get the first wave of Forms 8919, which taxpayers can file with their 2007 tax returns, to tell IRS that they believe their employers incorrectly classified them as contractors. A flood of these forms is likely because filing the 8919 allows an individual to avoid paying self-employment tax to the Service.

Businesses that are contacted by the Service needn't panic. There's relief under the law that may help them lessen the damage from an audit: They can invoke a 1978 law that limits the IRS' ability to reclassify workers. Companies must be able to show they filed 1099s on their workers and treated similarly situated workers as contractors. And the firms must have a reasonable basis for classifying them that way. Valid reasons include reliance on precedent, a court case or IRS ruling, prior industry practice or a previous IRS employment tax examination. And firms that can't get relief can still limit their tax bill. Reduced IRS penalties apply when misclassification is not intentional.

But more trouble looms for firms on the classification front. Democrats' high-profile probe into alleged intentional misclassification by a big government contractor increases the chances for legislation that would strengthen IRS' hand during exams. The bill would allow IRS to require reclassification of contractors as employees prospectively and end industry practice as a way for firms to avoid reclassification.

THE STIMULUS REFUND DATES ARE NOW SET

The first rebates will be wired on May 2 to taxpayers who had their 2007 refunds deposited directly to their bank accounts. The IRS will finish wiring these rebates by May 16. The order depends on the last two digits of the Social Security number of the primary filer...the lower the number, the quicker the payment.

Paper checks will start going out May 16 as well to nondirect depositors, based again on the last two digits of their Social Security numbers. The initial round of mailouts will be completed by July 11. Of course, if any back taxes are owed, the Service will grab a filer's rebate.

Returns must be filed by April 15th or you go to the back of the line.

WE ARE SAFE - CONGRESS IS IN RECESS

Both the U.S. House and Senate have adjourned for the two-week spring recess and will reconvene on Monday, March 31.

GUESS THE LANDMARK

This is a fun quiz to see how well we know our landmarks. Check it out at: http://www.guessthespot.com/

WHERE'S MY REBATE CHECK???

PBA WORKING TO HELP SALON INDUSTRY

The article, "PBA + SBA = A-OK," in Beauty Launchpad's, December 2007 issue describes how PBA is lobbying to help the salon industry.

"In 2004, the Small Business Administration (SBA) considered changing how the federal government defined a small business, which not only would have resulted in hundreds of salons losing their small-business status, but also would have placed a tremendous record-keeping burden on the thousands of salons that would still qualify as small businesses."

The combined effort of PBA and its members helped convince the SBA that the proposal wasn't in the best interests of the salon industry.

PBA is a great organization. If you don't belong, you should. Check out their website for more information: http://www.probeauty.org/.

ADD-ON SERVICES

The big beauty trend is to go bigger. Add-ons and spin-offs make more of every service.

If you have heard me speak before I'm sure you know that I discuss "5 Ways to Make More Money." One of the 5 Ways is to add on services. The December 2007 issue of Modern Salon, has a great article on this topic called, Adding Up To The Future.

Modern Salon is a great magazine. If you don't currently subscribe to it, make sure to check it out at:

http://www.modernsalon.com/

Larry Kopsa CPA

CHARITABLE CONTRIBUTIONS

I remember in one of your prior postings you talked about charitable contributions. There were some new requirements this year but I can't find the article. Could you refresh my memory? Thanks again for all the information for all of us stylists.

BB

BB - You are correct - there are some new rules this year. Your charitables are in jeopardy if you don't follow the new rules. Here they are...

Under the latest rules, the IRS does not allow a deduction for a contribution of under $250 of cash, check or any other monetary gift unless you have maintained a record of the contribution or a written communication by the charity.

For contributions of $250 or more you need a qualified receipt from the charity.

I you need more information, check out the following guide from the IRS:
Charitable Contribution Deductions (Publication 78 Help, Part II)

It is a pleasure serving you.

Larry Kopsa CPA

CAN I DEDUCT MY HOME INTEREST

Here is the deal. My dad lent me money to buy a house. I have been paying him interest all year. It looks like I can itemize my deductions this year if I claim the interest. My question is, "can I deduct the interest expense on my tax return?"

JJ

JJ - You are actually paying him back? Good for you. Normally loans to children end up as gifts as opposed to loans. I speak from experience. I admire you.

You can deduct the interest if you meet certain requirements. Most importantly, for the interest to be deductible as a qualified mortgage, it must be secured (lien filed) on the home. If there is no security interest, the interest is not deductible as home mortgage interest. Check with an attorney if a lien has not been filed.

Larry Kopsa CPA

EMPLOYEEE AWARDS

At one of your seminars, I remember you talking about how we could give awards to employees. I have some of my staff that I would like to provide awards to. Could you get me information on this?

Employee achievement awards can be very rewarding because they are not taxable to the recipient and are deductible by you. There are some specific requirements. On our website, we have a section called “Employee Achievement Awards.” Here is the link to that: Employee Achievement Awards

As you are looking at this, look very closely, because this cannot be an award in cash or near cash item, such as gift certificates or debit cards. It has to be actual property.

If you do have any questions on this, please feel free to contact me.

Larry Kopsa, CPA

THE IRS IS LOOKING AT INDEPENDENT CONTRACTORS

If you have been following my blog you know that I am concerned about the practice of classifying workers as independent contractors. I am not talking about booth renters, but rather the practice by many of simply not treating their workers as employees. This practice is good for the owner because they do not have to match Social Security and Medicare; pay Unemployment Taxes; pay Workman's Compensation; provide fringe benefits, or worry about the worker reporting their tips.

That sounds pretty good, but I don't think it will pass the IRS muster. If you provide control over the worker, most likely the worker is an employee. That is a discussion for another time.

Here is the issue that you need to be aware of. The IRS is now looking at worker classification. The IRS has just announced that it is going on the attack against firms that have misclassified workers. It is unveiling an electronic matching system to identify firms that issue 1099s with payments of at least $25,000 to five or more workers who don’t have any other sources of earned income. The Service suspects that in such cases the contractors may be employees for tax purposes. Businesses meeting these criteria will see employment tax audits in 2008.

You can't say that I did not warn you.

ON A PERSONAL NOTE

On a personal note, a couple of weeks ago I was honored to be asked by the State Chamber of Commerce to testify before the Nebraska State Legislature Revenue Committee supporting two proposed tax bills. This is the first time that I have been asked to testify, so it was very interesting to be involved with the process. Unfortunately, the committee has not yet taken action on the bills.

I serve as a board member of the Nebraska State Chamber of Commerce and chair the Small Business Committee.

FAT BILL IN MISSISSIPPI

'Nanny State: Mississippi bill would make it illegal for restaurants to serve the obese'

(TheSmokingGun.com) -- Mississippi state legislators last week introduced a bill that would make it illegal for state-licensed restaurants to serve obese patrons. Bill No. 282, which is likely dead on arrival, was introduced by two Republican and one Democrat. It proposes that the state's Department of Health establish weight criteria after consultation with Mississippi's Council on Obesity. It does not detail what penalties an eateries would face if they served someone with an excessive body mass index.

ARE YOU OR YOUR TEAM MEMBERS SLEEPING AT WORK?

(AP) — A survey released Monday by the National Sleep Foundation found participants average six hours and 40 minutes of sleep a night on weeknights, even though they estimated they'd need roughly another 40 minutes of sleep to be at their best. Roughly one-third of those surveyed said they had fallen asleep or become very sleepy at work in the past month. The average wake up is at 5:35 a.m. and it's followed by about two hours and 15 minutes at home before heading out to work, according to the survey. Average bedtime is 10:53.

CHOOSING A TAX PREPARER

I am a booth renter and I finally have my tax stuff in order and I am trying to decide how to choose someone to prepare my tax return. Do you have any advice?

Blondie

Blondie, you are wise in not waiting until the last minute to have your returns completed. I want you to know that our firm prepares well over 1,500 tax returns. With our knowledge of the salon and spa industry we could certainly prepare your returns for you. We always want to be up front about fees. If you could send me your 2006 return, I will review the return and give you a quote for your 2007 return. In addition, if I see any changes on the 2006 return I will let you know. No cost for this.

Having said that, here are some common signs that a tax preparer may be abusive:

• Claiming they can get bigger refunds than other tax preparers. Someone unfamiliar with your financial situation cannot make such a guarantee.
• Basing their fee on a percentage of the refund amount rather than the complexity of the tax return.
• Filing schedules where the information is fraudulent or lacks documentation to support the income or deductions.
• Refusing to sign the tax return as the paid preparer or not providing a copy for the taxpayer’s records. The preparer is required by law to sign the return.
• Requiring you to sign a blank return or in pencil.
• The preparer is not properly licensed or registered.

Larry Kopsa CPA